The cash market continued its broad, upward trajectory Monday, adding on average about 6 cents. Particularly strong were Northeast points and Southern California. Northeast gains were expected to subside Tuesday, but California pricing is following strong power generation demand. At the close of futures trading August had gained 3.6 cents to $3.117 and September had put on 3.5 cents to $3.111. September crude oil tumbled $3.69 to $88.14/ bbl.
Traders didn't think the titanic gains posted at some Northeast locations would continue Tuesday. "It's all a function of the weather," said a Houston-based marketer who concentrates on New England and Northeast markets. "I don't think it is going to be as hot. By Wednesday the high in Boston is 82 and back to normal. It's 91 tomorrow [Tuesday] with thunderstorms, so it's cooling off."
Other New England locations were expected to see a drop off in temperatures by Wednesday. According to Wunderground.com, the high in Hanover, NH, Tuesday was expected to reach 81 Tuesday before dropping to 77 on Wednesday. The normal high in Hanover is 83 at this time of year. New Haven, CT, was forecast to endure a high of 86 on Tuesday before Wednesday's more mild high of 79 sets in. The seasonal high for New Haven is 78.
The expected warmer temperatures were enough to lift next-day prices throughout New England. Quotes on Algonquin Citygate jumped more than 40 cents, and deliveries to Iroquois Waddington added more than a quarter. Parcels into Tennessee Zone 6 200 L surged more than 30 cents.
Other eastern points posted gains as well. Gas for Tuesday delivery on Dominion gained a few pennies and gas into Clarington Tennessee added about a nickel. Quotes on Tetco M-3 rose more than a nickel and gas on Transco Zone 6 New York gained over a dime.
Rising power demand in California helped lift next-day gas throughout California and the West. The California Independent System Operator (CAISO) said early afternoon system loads Monday were running 37, 539 MW, and Tuesday's peak load was forecast to reach 38,287 MW.
Next-day power pricing was mixed. At NP-15 IntercontinentalExchange reported next-day day-ahead locational marginal prices (DA LMP) rose $1.55 to $35.66/MWh but at SP-15 next-day DA LMP fell $1.79 to $39.61/MWh.
PG&E Citygate quotes rose nearly a nickel and deliveries to Malin were up a couple of pennies. At SoCal Citygate next-day gas gained nearly a dime, but gas at SoCal Border gas was nearly 20 cents higher and El Paso S Mainline gas was about a dime higher.
Across the Midcontinent gas for delivery Tuesday was up about a nickel on Oklahoma Gas Transmission, ANR SW, Panhandle Eastern and NGPL Midcontinent Pool.
Futures traders see the recent breach of $3 as putting prices on a path higher. "We just ran our numbers the other day and the market turned decidedly more bullish," said a Washington, DC, broker. The broker follows Elliott Wave model, which calls for market advances in five-wave patterns. Three waves, 1, 3 and 5 higher broken by two corrective waves, 2 and 4.
"We are currently in Wave 3, and the next stop should take us to $3.35, and if it blows through that we should see $3.85. The fifth wave comes in around $4.15. Also, the bar charts show an inverted head-and-shoulders and that technique takes us to the peak of the third wave at $3.85."
The broker admitted that his end-user clients weren't convinced the market would move higher "and are now kicking themselves. They have a case of the shoulda, coulda, wouldofs. A lot of people did not expect $3 to go, and when we tested $3 there was no volume and the back months were being sold."
He added that a recent article in Forbes citing the case for $8 gas "certainly has my producer clients all juiced up."
Richard Finger, author of the article, cites what he believes are deteriorating economics of drilling horizontal shale wells. High drilling and completion costs, uneconomic prices and ultimate recoveries of 6 Bcf per well are unlikely to make economic returns attractive. He said there is little production history to base reserve estimates from for multistage, horizontally fracked shale wells. Ultimately, falling production offset by rising demand in the form of increased natural gas use for power generation along with natural gas vehicles sets the stage for the price rally.
Much of Friday's 8-cent surge in the August contract was predicated on continued supportive weather forecasts. The forecasts still call for some large temperature anomalies over the central U.S., but forecasts haven't changed in the last few days. WSI Corp. of Andover, MA, in its six- to 10-day outlook shows extreme heat concentrated over Nebraska, Kansas, Iowa and portions of Missouri. "With the exception of the West Coast, Gulf Coasts and Northeast, above-normal temperatures are forecast over most of the country. Anomalies as warm as 10 degrees above normal are anticipated over the Midwest and central Plains. No major changes can be expected from [Sunday's] forecast."
Risks to the forecast include temperatures "trend[ing]a shade warmer over most of the country than currently forecast as the medium range models all advertise a strong sub-tropical ridge will grip most of the country in late July and early August," the forecaster said.
The tropics continue quiet. The National Hurricane Center in its 2 p.m. EDT Monday report said it was following a weak low-pressure trough over Florida and didn't expect any tropical cyclone development in the succeeding 48 hours.
Risk managers see a building natural gas market but aren't ready to commit to the long side just yet. "On a trade basis, we have been in a holding pattern for natural gas," said Mike DeVooght, president of DEVO Capital Corp. a Colorado-based risk management firm. To manage the present risk environment DeVooght said he has "stacked a few floors in October [bought put options] and [is] content to take a wait-and-see approach to this market. We do feel that the gas market is in the process of making a major bottom, but we have a hard time getting excited about the short-term upside potential."
For trading accounts and end-users, DeVooght counsels standing aside, but for those with exposure to lower prices he advises holding the remainder of an October $2.50 put position established earlier at a debit of 25-27 cents.
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